nexteer (1316.hk, buy)pg.jrj.com.cn/acc/res/hk_res/stock/2017/3/27/824912ef... · 2017. 3. 29. ·...
TRANSCRIPT
March 27, 2017
The Asia Stock Collection
Nexteer (1316.HK, Buy)
Upside: 19% Equity Research
Steering autonomously
Upcoming technology shift unravels a significant set of opportunities
In the last technology shift, Nexteer earned its place as the No. 3 global steering supplier (up 2 places from 2012; out of 7
competitors) gaining significant market share (from 4.8% in 2012 to 12.4% in 2018E). We believe the next major
technology shift — largely driven by Advanced Driver Assistance System (ADAS)/Autonomous Vehicle (AV) — is likely
to be a game changer for Nexteer. We expect the company to capture market share based on enhanced tech capability
and competitive advantage vs. peers, and reach new highs in terms of product ASP/margin/share on increased value
creation (i.e., more software/sensor/control). We forecast 20% earnings CAGR over 2018E-2020E. Reiterate Buy.
Belt on: 2018’s the take-off year
Despite the US$25.6bn backlog (6.7X of FY16E revenue), we forecast
muted 2017E earnings growth (7% yoy) on flat US/China market growth
and low new product contribution. While 2017 sees a transition in terms
of earnings, we believe it lays a strong foundation for the next cycle and
expect the share price to perform as more clarity emerges on: 1) R&D
milestone of Nexteer-Continental joint venture on integrated wire-
based/motion control system in 2H2017E; 2) Engaging with OEMs at an
early stage of their tech model development which would further enhance
Nexteer’s product credentials and support its positioning in potential
backlog bidding; and 3) Strategic investments/partnerships which the
company plans to pursue to improve its product suite/competitiveness in
the ADAS/AV space.
We believe valuation is attractive. The stock is currently trading at 10.0X
2018E P/E vs global peer average of 12.2X and its historical 12-month
forward P/E median at 9.6X.
Technology/competitive landscape analysis in focus
It is generally quite challenging to grasp the core of a supplier’s
investment thesis due to the lack of product/volume/ASP clarity and
segment context. For a concentrated segment with relatively high entry
barriers such as steering, we believe the technology upcycle offers not
only ASP/margin expansion potential, but also the opportunity for well
positioned players such as Nexteer to gain market share.
In our view, Nexteer is an early mover in the upcoming ADAS/AV cycle
and scores well on all critical aspects to capture the opportunity on the
back of: 1) leading steering technology, 2) continuous R&D in
software/sensor/control, 3) braking-steering integration, 4) being
independent as a supplier.
Yuqian Ding +86(10)6627-3327 [email protected] Beijing Gao Hua Securities Company Limited
Price 12m Target Price
HK$11.78 HK$13.98
Market Cap 12m ADTV
US$3.7bn US$6mn
1.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
Curating analyst stock ideas around Asia with
a focus on differentiated views, liquidity and
drivers in 2017 addressing eight core issues:
1. Investment thesis
2. The path forward
3. Where we are different
4. Forecast drivers
5. Valuation
6. Cash flow & balance sheet
7. Risks & pushbacks
8. External share price factors
Check out the full series on GS360 portal.
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 2
The prices in the report are as of the market close of March 24, 2017, unless stated otherwise.
Nexteer Automotive Group: Summary financials
Profit model ($ mn) 12/16 12/17E 12/18E 12/19E Balance sheet ($ mn) 12/16 12/17E 12/18E 12/19E
Total revenue 3,842.2 4,141.8 4,746.9 5,508.8 Cash & equivalents 484.5 736.7 1,015.1 1,255.4
Cost of goods sold (3,018.0) (3,245.0) (3,719.0) (4,316.0) Accounts receivable 589.6 635.6 728.5 845.4
SG&A (253.2) (277.1) (317.6) (364.1) Inventory 261.7 281.4 322.6 374.3
R&D (110.8) (119.5) (136.9) (158.9) Other current assets 91.7 91.7 91.7 91.7
Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 1,427.6 1,745.4 2,157.8 2,566.9
EBITDA 571.1 619.7 710.3 828.7 Net PP&E 779.1 851.2 937.9 1,118.1
Depreciation & amortization (162.6) (176.5) (186.0) (205.6) Net intangibles 449.7 366.1 282.5 198.9
EBIT 408.5 443.2 524.3 623.1 Total investments 10.6 13.4 16.7 20.3
Interest income 1.4 1.8 3.0 4.7 Other long-term assets 26.4 26.4 26.4 26.4
Interest expense (31.6) (29.5) (29.5) (29.5) Total assets 2,693.4 3,002.5 3,421.3 3,930.6
Income/(loss) from uncons. subs. 0.0 0.4 0.8 1.2
Others 7.7 (1.2) (1.2) (1.2) Accounts payable 604.5 650.0 744.9 864.5
Pretax profits 386.0 414.6 497.3 598.1 Short-term debt 75.5 75.5 75.5 75.5
Income tax (84.1) (90.3) (108.2) (130.1) Other current liabilities 180.3 184.7 197.4 212.9
Minorities (7.1) (7.7) (8.9) (10.3) Total current liabilities 860.3 910.2 1,017.8 1,152.9
Long-term debt 488.7 488.7 488.7 488.7
Net income pre-preferred dividends 294.7 316.6 380.2 457.7 Other long-term liabilities 253.4 253.4 253.4 253.4
Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 742.0 742.0 742.0 742.0
Net income (pre-exceptionals) 294.7 316.6 380.2 457.7 Total liabilities 1,602.3 1,652.2 1,759.9 1,894.9
Post-tax exceptionals 0.0 0.0 0.0 0.0
Net income 294.7 316.6 380.2 457.7 Preferred shares 0.0 0.0 0.0 0.0
Total common equity 1,059.0 1,312.3 1,616.5 1,982.6
EPS (basic, pre-except) ($) 0.12 0.13 0.15 0.18 Minority interest 32.0 38.0 45.0 53.0
EPS (basic, post-except) ($) 0.12 0.13 0.15 0.18
EPS (diluted, post-except) ($) 0.12 0.13 0.15 0.18 Total liabilities & equity 2,693.4 3,002.5 3,421.3 3,930.6
DPS ($) 0.02 0.03 0.03 0.04
Dividend payout ratio (%) 20.0 20.0 20.0 20.0 BVPS ($) 0.42 0.52 0.65 0.79
Free cash flow yield (%) 10.8 8.2 9.0 8.3
Growth & margins (%) 12/16 12/17E 12/18E 12/19E Ratios 12/16 12/17E 12/18E 12/19E
Sales growth 14.3 7.8 14.6 16.1 CROCI (%) 27.1 25.2 26.2 27.1
EBITDA growth 20.8 8.5 14.6 16.7 ROE (%) 31.2 26.7 26.0 25.4
EBIT growth 23.6 8.5 18.3 18.8 ROA (%) 11.4 11.1 11.8 12.5
Net income growth 43.5 7.4 20.1 20.4 ROACE (%) 28.9 29.5 34.3 38.2
EPS growth 43.4 7.2 20.1 20.4 Inventory days 31.2 30.5 29.6 29.5
Gross margin 21.5 21.7 21.7 21.7 Receivables days 55.1 54.0 52.4 52.1
EBITDA margin 14.9 15.0 15.0 15.0 Payable days 70.3 70.6 68.4 68.1
EBIT margin 10.6 10.7 11.0 11.3 Net debt/equity (%) 7.3 (12.8) (27.1) (34.0)
Interest cover - EBIT (X) 13.5 15.9 19.8 25.1
Cash flow statement ($ mn) 12/16 12/17E 12/18E 12/19E Valuation 12/16 12/17E 12/18E 12/19E
Net income pre-preferred dividends 294.7 316.6 380.2 457.7
D&A add-back 162.6 176.5 186.0 205.6 P/E (analyst) (X) 9.5 12.0 10.0 8.3
Minorities interests add-back 7.1 7.7 8.9 10.3 P/B (X) 2.6 2.9 2.3 1.9
Net (inc)/dec working capital 18.3 (20.2) (39.0) (49.1) EV/EBITDA (X) 5.1 5.9 4.8 3.8
Other operating cash flow 13.9 0.3 0.0 (0.4) EV/GCI (X) 1.5 1.7 1.4 1.2
Cash flow from operations 496.6 481.0 536.0 624.1 Dividend yield (%) 2.1 1.7 2.0 2.4
Capital expenditures (192.1) (165.7) (189.9) (303.0)
Acquisitions 0.0 0.0 0.0 0.0
Divestitures 0.0 0.0 0.0 0.0
Others (2.4) (2.4) (2.4) (2.4)
Cash flow from investments (194.6) (168.1) (192.3) (305.4)
Dividends paid (common & pref) (41.1) (58.9) (63.3) (76.0)
Inc/(dec) in debt 0.0 0.0 0.0 0.0
Common stock issuance (repurchase) 0.0 0.0 0.0 0.0
Other financing cash flows (193.4) (1.7) (1.9) (2.3)
Cash flow from financing (234.5) (60.6) (65.3) (78.3)
Total cash flow 67.6 252.2 278.4 240.3 Note: Last actual year may include reported and estimated data.
Source: Company data, Goldman Sachs Research estimates.
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 3
Content upgrade/add-on and share gain to drive earnings
Given the high entry barriers and technology-driven nature of the segment, we expect well
positioned technology-parts suppliers such as Nexteer to enjoy triple leverage
(ASP/margin/market share) in the next technology cycle.
We expect Nexteer’s revenue opportunities over the medium term to be driven by:
Higher ASP on content upgrade (ADAS-featured EPS and SBW)
Market share gain at the expense of other global peers’/OEMs’ in-house capacity on
its favorable positioning and leading technological capability.
On profitability, we expect:
Higher margins on increasing software/sensor/motor content in the mix
We forecast 17% earnings CAGR during 2016-2020E, although we expect relatively muted
2017E earnings growth rate at 7% on a high FY16 base and relatively limited conversion
gain on close to saturated EPS penetration in the US. However, we expect earnings growth
to reaccelerate starting 2018E on increasing upgraded product contribution.
Exhibit 1: We see ASP/margin/market share expansion to fuel earnings growth during 2016E-2020E
Net earnings walk, in US$mn
Source: Gao Hua Securities Research.
Suppliers have the key to value creation
New automotive innovations are increasingly developed by suppliers rather than OEMs,
with increased focus on the design, integration, assembly and distribution of vehicles.
Consulting firm Oliver Wyman estimates that suppliers will account for 69% value creation
by 2025E from 61% in 2012 (for details, please refer to our report Upward mobility: The rise
of global autos: Competitive Positioning in a growing, evolving autos industry, dated May1,
2014). In our view, this trend is being driven by the rising pressure on car manufacturers to
build economies of scale and leverage technologies and investments on higher volumes.
295
550
57
46
56
96
-
100
200
300
400
500
600
2016 earnings Market growth ASP increase Margin expansion Market share gain 2020E earnings
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 4
We estimate that globally ADAS/AV together would represent a US$100bn parts market by
2025E driven by six enablers: hardware, software, V2V/V2I (Vehicle to Vehicle and Vehicle
to Infrastructure), a favorable regulatory framework, consumer acceptance, and cyber
security.
Exhibit 2: We forecast 42% CAGR in ADAS/AV related revenue over 2015-25E, making the
overall profit pool worth US$96bn for AV suppliers Global ADAS/AV content revenue pool by region and content per vehicle
Source: Conti, Delphi, TRW, Magna, Autoliv, Mobileye, Quanergy, Ibeo, Cohda, Cisco, TomTom, Argus, Security Innovation, Broadcom, Nvidia, GM, Goldman Sachs Global Investment Research.
As the automotive industry enters the ADAS/AV cycle (with steering playing a critical
actuation role in the vehicle infrastructure), we expect the content to increase in the
existing EPS (Electric Power Steering) system such as dual core processing, multiple
sensors, collaboration with braking system, and additional redundancy to enable ADAS
features.
Moving forward, when the auto industry moves to the semi and fully autonomous driving
stage, we expect further upgrade to Steering By Wire (SBW) system (steering by braking,
i.e., steering with braking redundancy). In autonomous driving architecture, steering
system needs close collaboration with braking system on increasing requirements of
motion control integration, system safety and redundancy, precision, and reliability. As a
result, ADAS-featured EPS and SBW are likely to drive higher ASP/margin opportunities for
major competitors. We estimate ADAS-featured EPS is likely to enjoy 30% ASP increase
from the standard EPS system, and SBW is likely to boost ASP above US$500 (Exhibit 3).
Over the past technology cycle from HPS (Hydraulic Power Steering) to EPS, we saw
average operating profit margin for the industry increasing to 8.8% in 2016 (from 4.7% in
2012).
ADAS/AV likely to create a US$100bn revenue opportunity by 2025E
In ADAS/AV, steering remains critical and is likely to see content add-up/upgrade
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 5
Exhibit 3: ASP increase along with technology evolutionSteering system by generation ASP, in US$
Exhibit 4: Margin increase on increasing software/controlOperating profit margin, in %
Source: Company data, Gao Hua Securities Research.
Source: Company data, Gao Hua Securities Research.
Nexteer is well positioned to leverage ADAS/AV content opportunity
We see Nexteer as having demonstrated strong capability in the ADAS-featured EPS and
SBW systems. As in Exhibit 5, Nexteer already has ADAS-featured EPS systems in
production. On Jan 9-10, 2017, at the North American International Auto Show, Nexteer
debuted two by-wire based technologies, which are capable of SAE (Society of Automotive
Engineers) level 3 to 5 automated driving (that is semi to fully autonomous driving).
Nexteer also announced an agreement to form a joint venture with Continental in motion
control systems. We see the launch of SBW tech and strategic partnership with Continental
as key milestones for commercialization from 2018. With early launch of the next-
generation steering solution, Nexteer would be able to engage with OEMs at an early
stage of their AV model development and validation, which may further enhance its
product credentials and support its positioning in potential backlog bidding, in our view.
Exhibit 5: Nexteer is well prepared to leverage the ADAS/AV cycle, with a strong suite of products
Nexteer’s ADAS/AV related technology progress
Source: Company data, Gao Hua Securities Research.
Nexteer already has a small batch of ADAS-featured EPS products in production; we expect
increasing revenue contribution with ADAS penetration. We think consumption upgrade
(increasing consumer preference for comfort, safety and smart features) would drive ADAS
content adoption over the medium term. Further, we note that the commercial success of
top-selling models in 2016 (such as Geely’s NL-3 and GAC’s GS8)’s could be partially
attributed to their high ADAS equipment level.
57
220282
360
468
>500
0
100
200
300
400
500
600
700
Manual HPS Midsolution
EPS EPS(ADAS)
SBW
ASP
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
OPM
Nexteer JTEKT (steering&bearing)NSK(steering&bearing) ZF‐TRW (Chassis Systems)Bosch (Auto parts) TK‐presta (Auto parts)
ADAS/AV features/technologies Development type Levels of Autonomy (NHTSA) Estimated launch time
Driver Assist In Production
Lane Keeping In‐house Level 1‐2 In production
Pull Compensation In‐house Level 1‐2 In production
Park Assist In‐house Level 1‐2 In production
Stability Control Enhancements In‐house Level 1‐2 In production
Smooth Road Shake In‐house Level 1‐2 In production
Variable Effort In‐house Level 1‐2 In production
Active Damping In‐house Level 1‐2 In production
Active return In‐house Level 1‐2 In production
Patented next gen steering technology
Nexteer Steering on DemandTM System In‐house Level 3‐4 2018
Nexteer Quiet WheelTM Steering In‐house Level 3‐4 2018
In development technology
Integrated motion control Joint venture with Continental Level 3‐4 2019
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 6
We expect more ADAS to be introduced in new model launches given intensified
competition. We expect the ADAS-featured EPS and SBW products’ revenue mix to
increase to 5% in 2018E (vs marginal exposure currently) and further expand to 15% in
2020E. We also forecast net profit margin to expand to 8.0% in 2018E and 8.5% in 2020E on
back of increasing new product mix.
Exhibit 6: How is Autonomous measured? Snapshot of the various levels of autonomy according to NHTSA (National Highway Traffic Safety Administration)
Source: NHTSA, Goldman Sachs Global Investment Research
Nexteer to boost market share in the upcoming technology cycle
For suppliers, especially in a rather concentrated segment, we see market share reshuffle
opportunities generally emerging during a technology changeover. As a reference,
Nexteer’s market share rose to 10.8% in 2016E (from 4.8% in 2012) during the steering
segment technology conversion from HPS to EPS. Since its listing in Oct 2013, Nexteer has
grown revenue/earnings by 17%/39% during 2013-2016. Its market cap grew from
US$0.8bn to US$3.7bn (as of Mar22, 2017, close).
Why could it happen again this time?
1. Steering is a technology-parts segment, hence highly attractive: Due to the critical
nature of the steering system and segment concentration, we view steering as a
technology-parts segment. Technology-parts suppliers are well positioned and
structurally the most attractive within the auto space. The key growth drivers are: (1)
rising ‘supplied’ content per vehicle; (2) market share gains for globalized suppliers;
and (3) a shift in value-add innovative content towards suppliers. In addition to strong
structural growth, suppliers enjoy relatively strong pricing power (for details, please
refer to our report Upward mobility: The rise of global autos: Competitive positioning
in a growing, evolving autos industry, dated May 1, 2014).
2. Steering parts have high entry barriers due to increasing tech content and R&D needs:
We note that the entry barriers have been increasing over time, and along with
upgrades in steering technology have resulted in only a few competitors in the
segment. For example, back in the time when HPS was the predominant solution for
steering systems, there were more competitors in the segment. During the life cycle of
a car model/platform, there used to be several suppliers sharing the steering sourcing.
However, when EPS emerged to become the major solution, fewer players had the
technological capability and this reduced competition while bidding.
Driver attentiveness/road
monitoringComment Example
Level 0 No‐AutomationDriver in complete and sole
control
Could contain driver support systems, but only
warnings; driver never cedes controlBlind Spot Warning
Level 1Function‐specific
Automation
Driver maintains overall control,
but can cede limited authority
One or more specific control functions that
operate independent from each otherAdaptive Cruise Control
Level 2Combined
Function
Automation
Driver responsible for monitoring
the roadway and available for
control at all times on short
notice
At least two primary control functions designed to
work in unison to relieve driver control
Adaptive Cruise Control with
Lane Centering
Level 3Limited Self‐
Driving
Automation
Driver enabled to cede full
control under certain traffic
conditions, but is available for
occasional control with a
comfortable transition time
Vehicle designed to ensure safe operation during
automated driving mode, but can determine
when the system is no longer able to support
automation, i.e., an oncoming construction area
Autonomous Driving
Supporting Multitasking with
Transition Time Back to Driver
When Necessary
Level 4Full Self‐Driving
Automation
Driver to provide navigation
input, but is not expected to be
available for control at any time
during the trip
Vehicle designed to perform all safety‐critical
driving functions and monitor roadway conditions
for an entire trip.
Full Autonomous Driving in
Any Situation
Autonomy level
ADAS
AutonomousDriving
Nexteer doubled its market share during the past tech upgrade
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 7
Also, a technology changeover requires substantial R&D and development investment
in production facilities. Consequently, OEMs now have only one steering supplier
during the life-cycle of a particular model/platform. The growing entry barriers have
driven higher ASP, and increased pricing power over the model lifecycle and a more
secure backlog. In addition, with the model cycle refresh/changeover going forward,
we believe existing EPS suppliers will be favorably positioned to continue to supply as
second-generation development costs are only less than 20% vs. first generation
(Exhibit 8).
Exhibit 7: Car product cycle is on average 5-7 years
BMW 5 series life cycle
Exhibit 8: EPS suppliers difficult to be switched
Initial development cost vs. 2nd generation, initial cost
indexed as 1X
Source: IHS.
Source: Company data, Gao Hua Securities Research.
3. Nexteer is the best positioned to win market share: It is difficult to gain share during
an existing EPS cycle, and therefore the next market share reshuffle window which
likely lies with the technology shift from EPS to ADAS-featured EPS and then to SWB,
will be critical. We outline the key criteria for steering suppliers to stay competitive in
the potential market share reshuffle during the next tech shift. From this analysis, we
derive our positive view on Nexteer’s market share gains (Exhibit 11).
Steering technology (ADAS-featured and SBW) capabilities are critical: The
technological capabilities to develop and produce commercially reliable ADAS
EPS/SBW systems are critical to assess a company’s market share potential.
Nexteer showcased the commercially viable by-wire technology in the US auto
show on Jan 17, 2017. And early launch of the next generation technology would
help Nexteer engage with OEM clients at an early stage, which could potentially
lead to further product improvement and backlog lock-up.
Continuous R&D investment needed in software/sensor/motor: In the ADAS/AV
age, the actuation parts such as steering would partly/fully be commanded by
computers rather than human, which increases the complexity both mechanically
and electronically. More software/sensor/motor and redundancy will be added,
and the system requires a series of validations to ensure safety. As shown in
Exhibit 10, Nexteer has been investing heavily in R&D vs. peers.
Braking and whole AV architecture know-how: In the AV architecture, steering,
braking and throttling may all be operated by wire. The actuation modules such as
steering and braking may be more integrated in order to provide smooth and
accurate motion control. Both ZF and Bosch have their in-house braking divisions.
Nexteer has a strategic partnership with Continental – their nearly mutually
exclusive parts coverage also creates strong synergy in developing integrated
5-Series (2003)
5-Series (2010)
5-Series (2016)
0.2%
0.3%
0.4%
0.5%
0.2%
0.3%
0.4%
0.5%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
5-Series market share
1X
0.16X
0.0X
0.2X
0.4X
0.6X
0.8X
1.0X
1.2X
Initial development cost Gen 2 development cost
Nexteer scores well on all critical aspects to capture market share: 1) steering technology, 2) R&D in software/sensor/ control, 3) braking-steering integration, 4) independence as a supplier
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 8
motion control systems. So far, with technology readiness yet to be validated and
regulations to be finalized, we do not see a fully autonomous vehicle in mass
production. Early engagement with AV projects would put their supplier partner in
a favorable position to develop and fine-tune their next generation product in a
dynamic way. In 2016, Nexteer became a steering partner for Waymo (i.e.
Google’s driverless car division). The project with Google may not be meaningful
for near-term revenue/earnings, yet is critical from a strategic perspective as early
engagement with a leading AV developer could help Nexteer understand the most
advanced requirements for steering systems and build a capable module geared
with full autonomous car architecture. Similar projects also include Chevy’s Bolt
EV (GM and Lyft’s driverless car project).
Independence as a supplier: Due to supply chain security concerns, OEMs
generally prefer independent suppliers, which do not belong or are affiliated to
any other OEMs. Nexteer is an independent supplier, thus favored by OEMs in
comparison with peers that are affiliated to OEMs.
Exhibit 9: Nexteer is a steering pure play Y axis: steering revenue in US$mn; X axis: steering as % of
total revenue, 2016E
Exhibit 10: R&D as % of sales also high among peers R&D as % of sales, 2015
Note: R&D is on group level
Source: Company data, Gao Hua Securities Research.
Source: Company data.
Exhibit 11: Our competitive landscape analysis suggests Nexteer is well positioned Global 7 steering suppliers’ summary
Source: Company data, Gao Hua Securities Research.
‐
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0% 20% 40% 60% 80% 100%
Steering revenue (in US$mn)
Steering as % of total revenue
JTEKT
Bosch
NexteerNSKZF
Thyssenkrupp PrestaShowa
8.4%
6.1%
4.4% 4.1%2.9%
1.1% 0.7%
0%
2%
4%
6%
8%
10%
Bosch
Nexteer
ZF
Showa
JTEKT
NSK
Thyssenkrupp
Presta
R&D as % of revenue
Ticker Company business portfolio Sector
Affliation
(vs. OEM) Braking parts exposure AV project engagement
Company
JTEKT 6473.T
‐ Auto components
‐ Bearings
‐ Machinery
Machinery/auto Toyota n.a In‐house R&D on steer‐by‐wire
systems
Bosch private
‐ Auto components
‐ Home application
‐ Sensor/technology/service
Industrial/auto n.a In‐house Uber/Volvo driverless car
Nexteer 1316.HK Auto components Auto n.a JV with Continental Google driverless car
NSK 6471.T
‐ Auto components
‐ Bearings
‐ Machinery
Machinery/auto n.a n.a n.a
ZF private
Auto components Auto n.a In‐house (via acquisition of TRW) ZF ProAI jointly developed with
NVIDIA
Thyssenkrupp Presta private
‐ Diversified industrial (Construction,
Mining, Chemicals, Energy, White goods,
F&B, Aerospace, Shipbuilding,
Mechanical engineering etc.)
‐ Auto component
Industrial Conglomerate n.a n.a Cooperation with AdasWork on
autonomous control system
Showa 7274.T‐ Auto components
‐ Motorcycle components
Auto/Motor n.a n.a n.a
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 9
Discount to global peers unjustified; our TP implies 19% upside
We value Nexteer based on P/B-ROE regression against global comparable peers, as we
believe this is the most appropriate method due to the following reasons:
For cyclical industries, where returns fluctuate with the cycle, book value provides a
more stable reference to company value;
There are limited comparable peers in the H-share supplier space. So we select a
portfolio of global/regional comparable peers with similar business, client base, and
technology credentials to value Nexteer;
The company is expanding faster than the industry with significant capex and assets
(such as new plants under construction and new products under development) sitting
on the balance sheet. We think the P/B-ROE method is appropriate to ascertain the
value of these assets, which are not operating now but are expected to generate profits
in the future.
Accordingly, we derive a 12-month target price of HK$13.98, implying 19% potential upside.
Our target price implies 2017E/2018E P/E multiples of 13.2X/11X.
Exhibit 12: Nexteer looks undervalued vs. global peers 2018E PB vs. avg 2018E-2019E ROE
Exhibit 13: Nexteer enjoys leading ROE among peers
Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Exhibit 14: Currently trading at 11.3X 12m fwd P/E vs.
median at 9.6X 12m fwd P/E
Exhibit 15: Currently trading at 2.7X 12m fwd P/B vs.
median at 2.5X 12m fwd P/B
Source: Datastream, Gao Hua Securities Research. Source: Datastream, Gao Hua Securities Research.
y = 7.575x + 0.6334R² = 0.6845
0.00
0.50
1.00
1.50
2.00
2.50
3.00
5% 10% 15% 20% 25% 30%
2018E PB
Avg. 2018E‐19E ROE
NSK
JTEKT
Conti
BorgWarner
Weifu A
Minth Nexteer
Valeo
Autoliv
ROE quartilingTicker Company name 2015 2016E 2017E 2018E 2019E
6471.T NSK 15.2% 14.9% 8.1% 13.4% 13.2%
6473.T JTEKT 9.8% 10.5% 7.2% 10.5% 10.5%
CONG.DE Continental 23.3% 20.7% 21.8% 20.0% 18.4%
BWA BorgWarner Inc. 19.1% 20.8% 21.4% 21.4% 21.5%
000581.SZ Weifu A 13.4% 13.3% 14.0% 14.8% 15.1%
0425.HK Minth 14.5% 16.4% 18.1% 20.1% 21.5%
1316.HK Nexteer 27.2% 31.2% 26.7% 26.0% 25.4%
VLOF.PA Valeo 25.0% 26.5% 21.2% 20.1% 19.6%
ALV Autoliv 13.3% 15.9% 15.3% 15.4% 15.7%
0.0X
2.0X
4.0X
6.0X
8.0X
10.0X
12.0X
14.0X
Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16
12m Fwd P/E Median P/E
Median P/E = 9.6 X
0%
5%
10%
15%
20%
25%
30%
35%
0.0X
0.5X
1.0X
1.5X
2.0X
2.5X
3.0X
3.5X
4.0X
Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16
12m Fwd P/B (LHS) Median P/B ROE (RHS)
Median P/B = 2.5 X
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 10
Nexteer is attractively valued vs. both global and local peers
Exhibit 16: Nexteer is attractively valued vs. global auto parts coverage 2017E PB vs. avg. 2017-19E ROE
Note: Red dots are GH covered supplier stocks; blue dots are GS covered global supplier peer stocks.
Source: Quantum, Gao Hua Securities Research.
Exhibit 17: Nexteer is attractively valued vs. global auto parts coverage 2017E PB vs. avg. 2017-18E ROE
Note: Red dots are GH covered supplier stocks, blue dots are non-covered A share supplier stocks (the forecasts for which are from WIND consensus).
Source: WIND, Gao Hua Securities Research,
Nexteer
Minth
Huayu
Weifu (A)
Hyundai Mobis
Autoliv
CNH Industrial
Continental
Faurecia
GKN
Hella KGaA Hueck
Michelin
Nokian Renkaat
Valeo
Aisin Seiki BridgestoneDenso
Sumitomo
Toyota Boshoku
Lear Corp.
Johnson Controls
MagnaBorgWarner Inc.
Goodyear
Nemak
Motherson Sumi
Cheng Shin Rubber
Amara Raja Batteries
Bosch Ltd.
Exide Industries
0
1
2
3
4
5
6
7
8
9
10
5% 10% 15% 20% 25% 30% 35%
2017E PB
Avg. 2017E‐19E ROE
NexteerMinth
Huayu
JoysonWeifu (A)
Wanxiang
Zongshen Huaxiang
Wanfeng
HongtuYinlun
Tianrun
AP M&EXingminLongji
Yuandong ZYNP
Songz
Jingu
TJ Dies
Haili
Vie
WKW
ShuanglinJS Forging
Yunyi
Fulin Precision
DF Electronic
Hejia
NBTMDongan
FAWAY
Tuopu
Xingyu
HMT
Broadocean
0
2
4
6
8
10
12
14
0% 5% 10% 15% 20% 25% 30%
2017E PB
Avg. 2017E‐18E ROE
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 11
Strong balance sheet and cash flows allow room for acquisitions
With the EPS conversion cycle nearly complete in developed markets such as US and EU
(see Exhibit 18), we forecast Nexteer’s capex cycle to be largely over for now, before
reaccelerating in 2019. ADAS-featured EPS does not require significant investment in the
production line and the increased content is more on the software/sensor side. Software is
developed by Nexteer’s own R&D/engineering team. So we do not see capex to expand
much during 2017-18E. However, the steering-by-wire product may require a rather
significant change in the production line; we forecast capex spending to accelerate from
2019E.
Exhibit 18: EPS conversion cycle is largely over in DM
EPS penetration in US/EU and China
Exhibit 19: EPS capex cycle is over
Capex in US$mn, Capex as % of revenue (RHS)
Source: Company data, Gao Hua Securities Research.
Source: Company data, Gao Hua Securities Research.
Balance sheet is strong as Nexteer’s avg. 2017-19E gearing ratio is -27% vs. global peers’
4% and its historical avg. (2012-2016) at 76%. Nexteer’s FCF is also strong among peers as
its avg. 2017E-19E FCF yield is 9% vs. global peers’ avg. at 5%.
We see the strong balance sheet/cash flows likely supporting the company’s technology
capability enhancement and potential global partnership/acquisition opportunities.
We see payout ratio less likely to increase as it’s critical for the company to continuously
drive its strategic innovation. Given the increasing technology requirements in the ADAS/AV
cycle, we think capital allocation to innovation and potential M&A would be key.
Exhibit 20: Gearing lower than peers Net debt/equity ratio, Nexteer and peers’ avg.
Exhibit 21: FCF yield is higher than peers FCF yield ratio, Nexteer and peers’ avg.
Source: Company data, Gao Hua Securities Research.
Source: Company data, Gao Hua Securities Research.
0%
20%
40%
60%
80%
100%
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
2016
E
2017
E
2018
E
US EU China
-
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
-
50
100
150
200
250
300
350
2014 2015 2016 2017E 2018E 2019E
Capex Capex as % of Revenue (RHS)
‐50%
0%
50%
100%
150%
200%
250%
300%
2012 2013 2014 2015 2016E 2017E 2018E 2019E
Nexteer Global peers' avg.
‐12%
‐8%
‐4%
0%
4%
8%
12%
2012 2013 2014 2015 2016E 2017E 2018E 2019E
Nexteer Global peers' avg.
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 12
Exhibit 22: We expect Nexteer’s payout less likely to
increase on continuous investment requirements Nexteer dividend payout ratio and dividend yield, 2012-2019E
Exhibit 23: Nexteer’s payout is relatively lower among
peers Dividend payout ratio, 2017E
Source: Company data, Gao Hua Securities Research.
Source: Goldman Sachs Global Investment Research, Gao Hua Securities Research.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0%
5%
10%
15%
20%
25%
2013 2014 2015 2016 2017E 2018E 2019E
Dividend payout ratio Dividend yield (RHS)
20%
27%
40%36% 36%
32% 31% 30% 29%
17%
0%
10%
20%
30%
40%
50%
Nexteer
China auto avg.
Minth
NSK
Autoliv
Valeo
JTEKT
Weifu A
Conti
BorgWarner
2017E dividend yield
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 13
Navigating Trump policy impact, growth and technology rollout
In this section, we address the key risks to our view and 12-m target price:
#1: Potential Trump taxes and trade impact analysis
The Trump administration has signaled a set of wide-ranging changes across taxes and
trade. While the details are still unclear, our economists believe the US tax reform draft this
year could include: 1) a destination-based tax with border adjustment (they see a 20%
probability), 2) a corporate tax cut (they assume 25% from 35%), 3) 100% capex write-off in
the first year, and 4) the repeal of net interest expense deduction (for details, refer to the
report What Would the Transition to Destination-Based Taxation Look Like? dated Dec 8,
2016). The process is likely to get into full swing in the US Congress late March or April.
Although we do not attempt to predict the outcome of the US tax reform, we see a high
likelihood of suppliers with businesses deeply rooted in the US (e.g., US production plants)
having an edge vs. those which have net export exposure to the US.
We note that Nexteer’s global revenue is generated from its localized production footprint
and has limited export-to-US exposure. With 65% revenue exposure to North America in
2016, Nexteer is one of the most resilient names within our China auto component
coverage.
Exhibit 24: Nexteer’s revenue is mainly from NA Revenue by region, FY2016
Exhibit 25: Nexteer’s earnings is also mainly from NA EBITDA margin by region, FY2016
Source: Company data.
Source: Company data.
Exports from the rest of the world to the US are subject to a 2.5% tariff in case of finished
vehicles (excluding certain kinds of trucks) and 2.5%-5.7% for auto parts. Since the rest of
the 6 global steering peers are non-US companies, in case of a tariff hike, we believe
Nexteer is relatively well positioned as its US revenues are largely generated through
products produced locally vs. peers’ higher dependence on imports.
65%
23%
11%
North America Asia Pacific Europe and South America
15.0% 15.8%
19.3%
3.7%
0.0%
4.0%
8.0%
12.0%
16.0%
20.0%
24.0%
Group level North America Asia Pacific Europe and SouthAmerica
EBITDA Margin
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 14
Exhibit 26: North America production is 20% of global
Global light vehicle production volume, 2016E
Exhibit 27: US tariff on passenger cars is 2.5%
Tariffs for autos and auto parts (as of Feb 2017)
Source: Goldman Sachs Global Investment Research.
Source: World Tariff.
Before Trump came to power, Nexteer had planned a plant rotation to Mexico for cost
optimization purposes. Given the current Trump policy direction, we note that the mgmt
may adopt a wait and watch approach. We think potentially lower US tax and supportive
capex/interest burden treatment may drive cost optimization/plant rotation in the US. And
we also think the potential tariff impact could be partly offset by forex (see Exhibits 28-29).
Our analysis is for illustrative purposes only and we acknowledge that the final outcome
could vary depending on the actual legislation and companies’ tax strategies. In addition,
we do not take a view on government policy and we note that the final form of
implementation for any proposed changes is still widely uncertain.
Exhibit 28: Mexican Peso depreciated by 6% after the US
elections Forex trends
Exhibit 29: Illustration of how a tariff hike can be offset
by forex Destination tax after nominal forex rate
Source: Datastream.
Source: Goldman Sachs Global Investment Research.
20%
23%
28%
29%
North America Europe China Others
Product US Canada Product US CanadaAuto Bumper 2.5% 6.0%Passenger Car 2.5% 6.1% Seat belt 2.5% 6.0%Bus 2.0% 6.1% Brake 2.5% 6.0%Truck 25.0% 6.1% Gear Box 2.5% 6.0%Auto Parts Drive shaft 2.5% 6.0%rearview mirror 3.9% 6.0% Wheel 2.5% 6.0%Key 5.7% 6.0% Suspention 2.5% 6.0%Engine 2.5% 2.5%-6.0% Radiator 2.5% 6.0%Engine parts 2.5% 2.5%-6.0% Muffler 2.5% 6.0%Auto air conditioner 2.5% 6.0% Airbag 2.5% 6.0%Distributor 2.5% 6.0% Body 2.5%-4.0% 6.0%Ignition coil 2.5% 6.0% Steering 2.5% 6.0%Wiper 2.5% 6.0% Tire 3.4%-4.0% 7.0%Shield beam lamp 2.0% 6.0% EV Li Battery 3.4% 7.0%
16
17
18
19
20
21
22
23
Sep‐16 Oct‐16 Nov‐16 Dec‐16 Jan‐17 Feb‐17 Mar‐17
MXN/USD
US presidential election (Nov.8)Net importer Net exporter
High import share
Low import share
High profit margin
Low profit margin
Current law
FX (foreign currency per $) 1 1 1 1 1 1
Total sales (USD) 100 100 100 100 100 100
US sales (USD) 100 0 100 100 100 100
Foreign sales (foreign currency) 0 100 0 0 0 0
Total costs (USD) 90 90 90 90 50 98
US costs (USD) 45 45 0 90 25 49
Foreign costs (foreign currency) 45 45 90 0 25 49Tax burden at 20% 2 2 2 2 10 0.4After-tax profit 8 8 8 8 40 1.6
Destination-based taxation
FX (foreign currency per $) 1.25 1.25 1.25 1.25 1.25 1.25
Total sales (USD) 100 80 100 100 100 100
US sales (USD) 100 0 100 100 100 100
Foreign sales (foreign currency) 0 100 0 0 0 0
Total costs (USD) 81 81 72 90 45 88.2
US costs (USD) 45 45 0 90 25 49
Foreign costs (foreign currency) 45 45 90 0 25 49Tax burden (20%) 11 -9 20 2 15 10.2After-tax profit 8 8 8 8 40 1.6
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 15
Exhibit 30: Summary of tax reform proposals Tax reform proposals relative to current law
Source: Tax Policy Center, Goldman Sachs Global Investment Research.
#2: 2017 muted China and US market growth impact on Nexteer
In the US, HPS to EPS conversion cycle is largely over, and before the ADAS-featured EPS
kicks-in materially in 2018, we see Nexteer’s 2017E US growth to slow down from FY16.
However, we would highlight that Nexteer is more exposed to light truck (pick-up) and
SUV/CUV segments. Given the consumer preference on ride height and strong housing
project starts, we see SUV/CUV/pick-up segments to outgrow the overall light vehicle
market. During the Detroit auto show on Jan 13, 2017, both OEMs and suppliers saw a
continued mix shift towards light trucks even though oil/gasoline prices may rise.
Exhibit 31: We see growth of pick-up/SUV/CUV slightly
better than overall light vehicle in the US US light vehicle growth vs. pick-up +SUV/CUV segments
Exhibit 32: Light truck incentives are lower than cars Light truck incentives, % of ASP
Source: IHS, Gao Hua Securities Research.
Source: IHS, Gao Hua Securities Research.
In China, we see market growth to slow down on govt. subsidy cut and high base in 2017.
Nevertheless, the HPS to EPS conversion is only half way through. We still expect double-
digit sales growth from China Nexteer on its conversion gain and client base expansion.
Current Law House Republican Blueprint Trump Proposal
Domestic corporate rate 35% 20% 15%
Business expensing
Accelerated depreciation
with 50% bonus through
2017, 40% through 2018,
30% through 2018
100% expensed at time of
investment
Allow option of 100%
expensing
Net interest deductibility Unlimited Repeal deductibilityRepeal deductibility for
those who expense
Foreign income 35% (minus foreign tax
credits)0% (full territorial system)
15% (repeal deferral
but allow foreign tax
credits)
Repatriation 35% (minus foreign tax
credits)
8.75% on cash 3.5%
otherwise
10% on previously
untaxed earnings
Destination‐basis/border
adjustment N/A
Deny deduction of import
costs, exclude export related
income
N/A
‐30%
‐25%
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
20%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Overall US LV yoy growth Pick‐up + SUV/CUV yoy
9.4% 9.8%
14.1%
10.0%
0.0%
4.0%
8.0%
12.0%
16.0%
Light truck(current)
Light truck(historical
avg.)
Passenger car(current)
Passenger car(historical
avg.)
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 16
Exhibit 33: Nexteer is more exposed to SUV segments
China car growth vs. SUV segment
Exhibit 34: HPS to EPS conversion is not over yet
EPS penetration
Source: IHS, Gao Hua Securities Research.
Source: Company data, Gao Hua Securities Research.
#3: ADAS/AV commercialization execution/delivery risks
With solid momentum in the technology progress and being open to suitable M&A, we see
Nexteer as well positioned to face industry challenges. Nevertheless, along with the
increasing complexity of autonomous vehicle architecture and actuation systems
(including steering, braking and throttling), there may also be potential technology
bottlenecks or hurdles. We would keep a close watch/frequently evaluate according to the
upcoming milestones such as commercially viable integrated motion control technology
(to be delivered by Nexteer-Continental joint venture), ADAS-featured EPS and SBW
program, etc.
#4: Competition and peers’ strategy
Nexteer is a pure play in the steering segment while the rest of the 6 major global
competitors have other business departments as a diversification of their product line. In
an extreme case, there is a risk that peers could take a more aggressive pricing stance
during new product bidding as they have other business lines to stabilize the short-term
profitability fluctuations. However, we see peers less likely to change their strategy in the
steering segment significantly in the near term as we expect further tech upgrades to be
gradual.
#5: FX risks
In our view, Nexteer tends to keep its global business naturally hedged, that is, to increase
localization rate in each region of production. However, we see potential FX risks during
the period of ramping up, esp. during the strategic business expansion stage.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
E
2017
E
2018
E
2019
E
China SUV growth yoy China car market growth yoy
0%
20%
40%
60%
80%
100%
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15E
20
16E
20
17E
20
18E
US EU China
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 17
Backlog visibility and ADAS/AV milestones to drive share price
Backlog is a key factor to evaluate supplier’s future earnings quality
The core of OEM investments is their product cycle, whether the car manufacturers can
produce commercially successful cars. We can validate the momentum from high
frequency data point such as monthly sales.
For suppliers, it’s relatively difficult to track from high frequency data point perspective.
The revenue and earnings estimations are largely determined by backlog booking. Backlog
is the accumulated ‘booked yet to be delivered’ revenue over the coming periods. It
provides visibility to evaluate a supplier’s mid-to-long revenue potential.
A continuously growing backlog reflects future earnings visibility and quality. Nexteer
currently has US$25.6bn backlog (expanded by US$1.6bn from US$24bn in end-Sep 2016),
which is about 6.7X its FY16 revenue. We see further backlog expansion may drive Nexteer
share price as the market would get more visibility on future growth.
Exhibit 35: Nexteer’s backlog is 6.7X of its FY16 revenue
Backlog as of Dec 31, 2016
Source: Company data.
Technology and positioning likely to drive backlog expansion in tech changeover
We see ADAS upgrade and future technology changeover from EPS to SBW likely to drive
changes in steering segment’s competitive landscape, as we discussed in the above
section.
The competitor (such as Nexteer) which has strong technological capability and active
early engagement with OEMs on next generation product development, may enjoy higher
backlog expansion opportunities vs. peers, in our view.
We note that the market focuses a lot on backlog expansion/earnings delivery. And we see
the ADAS/AV technology shift starting to accelerate. Thus technology capability and
competitive positioning are critical to evaluate key competitors’ backlog expansion
opportunities over the coming 5-7 years.
US$24bn
US$3.8bn
US$25.6bn
0.0
5.0
10.0
15.0
20.0
25.0
30.0
FY16 Backlog (Sep16) Backlog (Dec16)
Driveline
CIS
HPS
EPS
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 18
Exhibit 36: We see strong backlog growth, earnings delivery and technology milestones to
drive stock price Nexteer market cap performance since listing, in US$mn
Source: Datastream, Gao Hua Securities Research.
We expect key tech milestones/sign of early commercialization to drive stock further
Given the solid ADAS/AV progress from OEMs/disruptor/supplier aggregator side, we see
more concrete milestones/pioneer project delivery to be critical. For Nexteer, we expect
technology milestones such as integrated motion control technology and signs of early
commercialization of SBW product to drive stock price further.
In our global automotive report Cars 2025: Vol. 3: Monetizing the rise of Autonomous
Vehicles, September 17, 2015, we projected gradual growth on the “consumer” side. Our
forecast that semi-autonomous (Level 3 AVs) will be available in the US around 2018 is
equivalent to about half a product cycle (meaning cars are already being developed with
this capability in mind), and our forecast for full autonomous (Level 4 AVs) in 2025 is about
two product cycles away. However, adoption of full autonomous driving could be achieved
earlier on the “fleet” side as cities like Amsterdam, Singapore, and Luxembourg are
looking to adopt AV much sooner (which could be commercially viable around 2020).
Exhibit 37: We see level 3 semi-autonomous driving to get set around 2020 and level 4 autonomous driving around 2025
Timeline of enablers for the implementation of autonomous driving (US market only)
Source: Goldman Sachs Global Investment Research.
0
5000
10000
15000
20000
25000
30000
0
500
1000
1500
2000
2500
3000
3500
4000
Oct‐13 Jan‐14 Apr‐14 Jul‐14 Oct‐14 Jan‐15 Apr‐15 Jul‐15 Oct‐15 Jan‐16 Apr‐16 Jul‐16 Oct‐16 Jan‐17
Market Cap (in US$mn) Hang Seng Index (RHS)
1H16 earnings beat
New gen tech debut and partnership with Conti
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Hardware
Software
Cyber security
Societal acceptance
Time frame until scale implementation
Level 1‐2 Level 3 Level 4
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 19
We note that the potential autonomous driving commercialization could set in earlier than
we expect. As summarized in Exhibit 38, on the “fleet” side, Uber is already operating the
driverless car service in Pittsburgh and Arizona. On the “consumer” side, Tesla has
announced to introduce a full self-driving car by 2018 and a few major OEMs have
expressed intent to launch full self-driving cars by 2020/2021.
Exhibit 38: OEMs/Suppliers/Disruptors are racing to develop autonomous vehicles Autonomous driving by company, summary
Source: Company data.
Company name Type Partnership Acquisition Investment Semi‐autonomous Full autonomous Summary
Tesla OEM/disruptor Autonomy on
highway already
available
2018 ‐ Tesla CEO Elon Musk announced in late October 2016 that cars currently in production —
which includes the Model S, Model X, and future Model 3 — will be built with new hardware
that will enable them to be fully driverless, pending regulatory approval and further software
validation.
‐ Musk has been committed to having a fully self‐driving car ready by 2018
BMW OEM Intel/Mobileye HERE (the former mapping
division of Nokia, together with
Mercedes and Audi)
2021 ‐ BMW will test 40 self‐driving cars on public roads in the second half of 2017.
‐ BMW is also planning to release self‐driving vehicles in China in 2021.
‐ BMW is committed to releasing an all‐electric car with the autonomous capabilities in late
2021 as part of its Project iNext. By 2025, the Project iNext car will be fully autonomous.
Daimler OEM HERE (the former mapping
division of Nokia, together with
BMW and Audi)
Autonomy on
highway already
available
2020 ‐ Daimler executives have said the system powering the autonomous truck, dubbed Highway
Pilot, may be ready for real‐world application by 2020.
Volvo OEM Uber 2017 2020 ‐ Volvo is aiming to make its cars “death proof” by 2020 by rolling out semi‐autonomous
features, eventually working up to fully driverless ones.
Toyota OEM 2027 ‐ Toyota is pursuing self‐driving cars, but is taking a more conservative approach than other
companies.
‐ Toyota is looking to introduce a Level 4 self‐driving car in 10 years as part of its Chauffeur
project.
Nissan OEM 2020 ‐ Nissan is committed to have a commercially viable autonomous car on the roads by 2020.
‐ Nissan will continue to add driverless capabilities to ProPILOT until it has a fully self‐driving
car in 2020.
Ford OEM Velodyne (Lidar
supplier)
2021 ‐ Ford will roll out a fleet of self‐driving cars as part of a ride‐sharing or ‐hailing service by
2021.
GM OEM Lyft Cruise Automation (self‐driving
car start‐up)
Lyft ‐ General Motors has partnered with Lyft to build electric, fully driverless cars that will be
available to just about anyone.
Audi OEM NVIDIA HERE (the former mapping
division of Nokia, together with
Mercedes and BMW)
2020 ‐ Audi has teamed up with Nvidia to bring fully self‐driving vehicles to the market in 2020.
Honda OEM 2020 ‐ Honda is aiming to produce cars that are completely driverless on highways by 2020.
Hyundai OEM 2020 2030 ‐ Hyundai is aiming to have highway driverless features in its cars by 2020, but won’t have a
fully autonomous car ready until 2030.
PSA OEM 2020 ‐ PSA is aiming to have fully driverless cars ready by 2020.
Bosch Supplier 2026 ‐ Bosch has been working on driverless technology for several years with the goal of releasing
fully driverless software within the decade.
‐ Bosch might not plan to build an actual self‐driving vehicle (Focusing on system and
sensors)
Waymo (Google) Disruptor FCA Increasing testing
fleet on road in
2017
‐Google spun out its self‐driving car unit into an independent company, called Waymo, in
December 2016. Waymo is now operating under Google’s parent company Alphabet.
‐Waymo has said it’s not interested in building a car, but in selling the tech to automakers.
Uber Disruptor Volvo Otto (self‐driving truck start‐
up)
Robot taxi service
available in
Pittsburgh and
Arizona (with
engineer on
board)
‐Uber is letting people take a ride in its self‐driving cars in both Pittsburgh and Arizona.
Baidu Disruptor Velodyne (Lidar
supplier)
2018 ‐ Baidu is aiming to have a commercial model of its driverless car ready by 2018.
Apple Disruptor ‐ Apple was originally aiming to ship its car in 2019, the Wall Street Journal originally
reported in September 2015.
‐ But Bloomberg reported in October 2016 that Apple is prioritizing working on the software
for a driverless car rather than building an actual autonomous car from scratch.
Didi Disruptor Uber China ‐ Didi founder and CEO Cheng Wei said in a Bloomberg article that he was hiring data
scientists in Silicon Valley to build a self‐driving car.
Launch schedule
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 20
We see solid regulatory progress and increasing consumer acceptance
In the Detroit auto show during Jan 8-22, 2017, Mark Rosekind, administrator of the NHTSA
–the governmental body in-charge of writing and enforcing traffic safety regulations – gave
a presentation on regulatory developments in autos. Key takeaways are as follows:
Proactive approach: The NHTSA has overhauled its regulatory approach in the most
significant way in 40 years. This new approach should allow the agency to implement
dynamic regulations in tandem with new technological advancements, with the goal of
innovation velocity and pedestrian protection. Further, it is working to help organically
drive the industry to adopt incremental safety features as standard – without the need
for a rulemaking process – through the New Car Assessment Program.
V2V proposal: The agency has proposed a rule about vehicle-to-vehicle
communication, which will help allow cars to “see around corners,” unlike current
sensor arrays. This technology is seen as necessary for connected and autonomous
vehicles – not just by NHTSA, but also by industry participants.
Federal AV policy: NHTSA also came out with a detailed policy in 2016 for autonomous
vehicles in an effort to set the stage for automotive companies and a regulatory
framework. On the former, there is a 15-point Safety Assessment to set clear
expectations for manufacturers developing and deploying automated vehicle
technologies. On the latter, there is a model state policy that delineates the Federal and
State roles in an effort to build a consistent national framework.
On the content adoption front, we see ADAS content (level 1 and 2 autonomous)
installation is gaining strong momentum. In 2016 China car market, where in general, the
ADAS installation rate is lagging global peers, we saw a clear trend of auto consumption
upgrade as consumers preferred more comfortable, smarter and safer functionalities. We
also attribute part of the commercial success of select top selling local brands’ models such
as Geely’s NL-3 and GAC’s GS8 to their heavy load of ADAS content. We believe this might
drive ADAS content adoption in 2017 given intensifying competition and a series of new
model launches.
Exhibit 39: Geely NL-3’s content is catching on Mercedes Comparison of select equipment between Geely NL-3 SUV and Mercedes Benz models
Source: Baidu Search Index.
Equipment Geely Boyue Mercedes GLC Mercedes C class
Electronic Parking Brake Systems √ √ √
Electronic Stability Program √ √ √
Lane Departure Warning Systems √ √ √
Adaptive Cruise Control √ √ √
Panoramic Camera √ √ √
GPS Navigator √ √ √
Park Assist Vision Systems × √ √
Blind Spot Monitoring Systems × √ √
Panoramic Sunroof √ √ √
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 21
Appendix: History, shareholders, case study
Nexteer is a global steering supplier based in the US, owned by China AVIC group (SOE)
and listed in Hong Kong.
Nexteer is a steering parts pure play, originated from GM/Delphi
Nexteer is a global tier 1 technology parts supplier specializing in steering parts. The
company’s history spans a century with relatively complicated acquisitions/corporate
restructuring events in the past decade.
The company was founded as Jackson, Church & Wilcox Co. in the US in 1906. It then
became the first automotive parts manufacturing division of General Motor (GM) in 1917.
GM created Delphi in 1998 and moved its steering operation to Delphi. Delphi was then
spun off by GM and became an independent, publicly held corporation in 1999. Delphi filed
for Chapter 11 (bankruptcy) to reorganize its US operations in 2005. GM acquired the
steering operations from Delphi and renamed it as Nexteer in 2009. Beijing E-Town
acquired Nexteer from GM and transferred the acquired interest to PCM in 2010. AVIC
acquired 51% of PCM and became Nexteer's controlling shareholder in 2011. The
management and technology team has remained stable after AVIC’s acquisition.
Exhibit 40: Nexteer’s top customer is GM… Top customers, 2015
Exhibit 41: …and is predominantly exposed to US and
China
Geographic revenue split, 2015
Source: Company data
Source: Company data
Controlling stakeholder AVIC is a strong supporter of China expansion
As we discussed in the industry section, the HPS to EPS shift is largely done in developed
markets, while we still see penetration opportunities in China.
We believe AVIC, the controlling stakeholder of Nexteer, would be of help to Nexteer to
penetrate in China. China local car makers have around 38% market share. Among China’s
local OEMs, 65% are currently affiliated brands of auto SOEs. We believe AVIC’s support
would help Nexteer penetrate SOE’s own brands.
For the joint ventures (62% of the China’s current car market mix) between China auto
SOEs and foreign car makers, we see increasing bargaining power from the joint ventures
in business decision-making such as sourcing given the China portion is increasingly
substantial in their foreign partner’s profit pool.
49.0%
13.0%
17.0%
5.0%
3.0%
2.5%10.5%
GM
Ford
FCA
PSA
BMW
SGM-Wuling
Others
66%
22%
China: 12%
2%
North America
China
European
RoW
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 22
Exhibit 42: China’s local brands have 37.6% market
share…
Exhibit 43: …of which, SOEs account for 65%
Source: ChinaAutoMarket. Source: ChinaAutoMarket.
Exhibit 44: China contribution is now a substantial portion of profit pool of global car makers 2016E, in thousand units
Source: Goldman Sachs Global Investment Research.
Exhibit 45: AVIC’s current group summary
Note: AVIC now owns 23% of Changan Auto’s parentco post 2009 restructuring with CSIG (China South Industries Group)
Source: Company data.
29.0% 28.8% 28.2% 25.9% 31.1% 31.8% 29.3% 29.5% 32.7% 33.4% 37.6%
23.1% 23.5% 27.9% 30.4% 25.1% 23.6%22.9% 19.7% 17.8% 16.7%
17.2%
11.1% 10.0% 6.8% 8.3% 10.4% 9.9%10.3%
10.5% 10.0% 9.9%8.4%
13.5% 14.2% 13.7% 12.0% 12.2% 13.0% 13.8% 14.3% 14.2% 13.8%12.9%
23.3% 23.5% 23.4% 23.4% 21.1% 21.8% 23.7% 26.0% 25.3% 26.3% 24.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Chinese Japanese Korean American European
60% 60% 57% 55% 61% 66% 65%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012 2013 2014 2015
SOE's affliated brand Private
2016E BMW Mercedes VW PSA Renault FCA Faurecia Hella Valeo Autoliv Continental
Net income
Group net income 6,342 9,214 8,684 1,714 3,409 2,046 512 377 874 572 2,954
Tax rate 33% 32% 25% 33% - - 31% 25% 18% 33% 28%
China consolidated net income 1,968 1,973 1,879 - - - 184 55 200 109 433China equity income 502 516 3,151 - - - 0 0 0 0 0China net income 2,471 2,489 5,030 557 200 86 184 55 200 109 433as % Group net income 39% 27% 58% 33% 6% 4% 36% 15% 23% 19% 15%
Military Aviation and
defense
Civil Aviation
Transportation
Power & Energy
Electronic Equipment
Electronics
General and special
equipment
Materials Environmental Protection
Architectural Engineering
Trade & Logistics
Capital
Media & Consultancy
IT & Software
IT & software
AVIC group(unlisted)
Bus Special Vehicle Automobile Equipment
Auto Parts Shipping Smart Transportation
Engine Air Intake System
Thermal Management
System
Electrical & Electric product
Security System
Vehicle Body & Structural Parts
Changan Auto’s parentco
NexteerOther parts subsidiaries ....
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 23
Case study: Positioning and strategy in technology cycle matters
Stanley case study: Technology changeover and peers’ strategy might reshuffle competitive landscape
Both Stanley and Koito are Japanese automotive lighting system suppliers. For the longest
time, the industry‘s mainstream solution for lighting systems has been halogen. Stanley is
the No. 5 global player but its margin was higher than global No. 1 Koito. However, the
industry gradually started adopting LED lighting systems. During the transition, Koito took
a more aggressive approach with its LED product vs. Stanley, including pricing discounts.
Koito subsequently boosted its market leadership in LED headlamps to 52% in 2013 vs.
26% share in headlamps in 2011. Eventually, Koito managed to boost margins on
volume/margin gains driven by product upgrades (i.e. LED). On the contrary, Stanley
moved relatively slow during the technology transition and eventually lost its edge in
growth momentum and margin.
Exhibit 46: Koito had highest share in headlamps… Headlamp global market share (2011)
Exhibit 47: …and also became dominant in LED-HL LED-HL global market share (2013)
Source: Company data.
Source: Company data.
Exhibit 48: Stanley lags Koito in terms of LED
installation ratio LED installation ratio trend at Stanley Electric and Koito
Exhibit 49: Our Japan auto team expects Stanley’s
margin to remain under pressure Operating margin trend at Stanley Electric (automotive
business) and Koito
Source: Company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
Koito, 26%
Valeo -Ichikoh, 23%
Automotive Lighting, 20%
Hella, 17%
Stanley, 10%
Others, 4%
Koito, 52%
Hella, 24%
Magneti Marelli, 8%
Stanley, 6%
Other, 10%
0.5%
4%
7%
13%
22%
2%
6%
12%
17%
22%
25%
30%
0%
5%
10%
15%
20%
25%
30%
35%
2011/3 2012/3 2013/3 2014/3 2015/3 2016/3E 2017/3E
Stanley Koito
0%
2%
4%
6%
8%
10%
12%
14%
16%
Stanley Koito
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 24
Exhibit 50: Supplier valuation summary
*The stock is on regional Conviction List.
Source: Quantum, Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Exhibit 51: Key events to watch
Source: Company data, Gao Hua Securities Research.
Valuation Summary - Global comparable peersTicker Company name Rating Current Price Market cap EPS%
USD'mn16-19E CAGR 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
6471.T NSK Neutral 1,637.00 7,739 0% 24.1X 14.1X 13.1X 2.0X 1.8X 1.7X 8% 13% 13% 2% 2% 2% 5% 8% 8% 1% 5% 5%6473.T JTEKT Neutral 1,788.00 5,505 4% 18.5X 12.1X 11.2X 1.3X 1.2X 1.1X 7% 10% 10% 2% 2% 2% 6% 7% 7% 1% 5% 5%CONG.DE Continental Buy 199.65 43,148 11% 11.8X 10.9X 10.3X 2.4X 2.0X 1.8X 22% 20% 18% 2% 3% 3% 12% 12% 12% 5% 7% 8%BWA BorgWarner Inc. Neutral 41.28 8,906 10% 12.1X 10.8X 9.6X 2.5X 2.2X 2.0X 21% 21% 22% 1% 1% 2% 16% 16% 16% 6% 7% 8%000581.SZ Weifu A Buy 23.53 3,484 16% 12.4X 10.7X 9.3X 1.7X 1.5X 1.3X 14% 15% 15% 2% 3% 2% 16% 17% 17% 4% 1% 3%0425.HK Minth Neutral 32.25 3,963 23% 16.4X 13.2X 10.8X 2.8X 2.5X 2.2X 18% 20% 22% 2% 3% 4% 20% 22% 23% 3% 4% 4%1316.HK Nexteer Buy 11.78 3,788 16% 12.0X 10.0X 8.3X 2.9X 2.3X 1.9X 27% 26% 25% 2% 2% 2% 25% 26% 27% 8% 9% 8%VLOF.PA Valeo Sell 59.99 15,257 5% 15.2X 13.8X 12.3X 3.0X 2.6X 2.3X 21% 20% 20% 2% 2% 3% 11% 11% 11% 3% 4% 5%ALV Autoliv Neutral 101.68 8,968 8% 15.1X 13.8X 12.5X 2.2X 2.0X 1.9X 15% 15% 16% 2% 3% 3% 12% 12% 12% 3% 4% 5%
Global glass avg. 10% 15.3X 12.2X 10.8X 2.3X 2.0X 1.8X 17% 18% 18% 2% 2% 3% 14% 14% 15% 4% 5% 6%
Valuation Summary - Global suppliersTicker Company name Rating Current Price Market cap EPS%
USD'mn16-19E CAGR 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
1316.HK Nexteer Buy 11.78 3,788 16% 12.0X 10.0X 8.3X 2.9X 2.3X 1.9X 27% 26% 25% 2% 2% 2% 25% 26% 27% 8% 9% 8%0425.HK Minth Neutral 32.25 3,963 23% 16.4X 13.2X 10.8X 2.8X 2.5X 2.2X 18% 20% 22% 2% 3% 4% 20% 22% 23% 3% 4% 4%600741.SS Huayu Neutral 17.44 6,540 5% 9.0X 8.4X 7.8X 1.3X 1.2X 1.1X 15% 15% 15% 6% 6% 7% 18% 17% 16% 4% 5% 7%000581.SZ Weifu (A) Buy 23.53 3,484 16% 12.4X 10.7X 9.3X 1.7X 1.5X 1.3X 14% 15% 15% 2% 3% 2% 16% 17% 17% 4% 1% 3%
China avg. 15% 12.5X 10.6X 9.1X 2.2X 1.9X 1.6X 18% 19% 19% 3% 4% 4% 20% 20% 21% 5% 5% 6%012330.KS Hyundai Mobis Neutral 247,500 20,849 2% 7.6X 7.5X 7.3X 0.8X 0.7X 0.6X 10% 10% 9% 1% 1% 1% 7% 7% 7% 2% 3% 4%161390.KS Hankook Tire Buy* 55,400 6,112 5% 7.7X 7.3X 6.9X 1.0X 0.9X 0.8X 14% 13% 12% 1% 1% 1% 12% 12% 12% 8% 11% 15%
Korea avg. 3% 7.6X 7.4X 7.1X 0.9X 0.8X 0.7X 12% 11% 11% 1% 1% 1% 10% 9% 10% 5% 7% 10%ALV Autoliv Neutral 101.68 8,968 8% 15.1X 13.8X 12.5X 2.2X 2.0X 1.9X 15% 15% 16% 2% 3% 3% 12% 12% 12% 3% 4% 5%CNHI CNH Industrial Buy* 9.69 13,217 52% 24.5X 15.7X 12.5X 2.7X 2.4X 2.1X 12% 16% 18% 2% 3% 3% 8% 9% 9% 4% 6% 7%CONG.DE Continental Buy 199.65 43,148 11% 11.8X 10.9X 10.3X 2.4X 2.0X 1.8X 22% 20% 18% 2% 3% 3% 12% 12% 12% 5% 7% 8%EPED.PA Faurecia Neutral 42.00 6,226 4% 9.4X 9.0X 9.1X 1.5X 1.4X 1.2X 18% 16% 14% 2% 2% 2% 11% 11% 10% 7% 8% 9%HLE.DE Hella KGaA Hueck Neutral 40.63 4,877 18% 13.3X 11.2X 10.4X 2.1X 1.9X 1.8X 17% 18% 18% 2% 3% 3% 10% 11% 11% 3% 4% 6%MICP.PA Michelin Buy 111.85 21,985 9% 11.7X 10.3X 9.4X 1.7X 1.6X 1.4X 16% 16% 16% 3% 4% 4% 9% 9% 9% 5% 8% 9%NRE1V.HE Nokian Renkaat Neutral 39.14 5,696 10% 19.9X 17.3X 15.9X 3.5X 3.4X 3.2X 18% 20% 21% 4% 4% 4% 18% 19% 19% 2% 4% 5%VLOF.PA Valeo Sell 59.99 15,257 5% 15.2X 13.8X 12.3X 3.0X 2.6X 2.3X 21% 20% 20% 2% 2% 3% 11% 11% 11% 3% 4% 5%
Europe avg. 15% 15.1X 12.8X 11.5X 2.4X 2.2X 2.0X 17% 18% 18% 3% 3% 3% 11% 12% 12% 4% 5% 7%6473.T JTEKT Neutral 1,788.00 5,505 4% 18.5X 12.1X 11.2X 1.3X 1.2X 1.1X 7% 10% 10% 2% 2% 2% 6% 7% 7% 1% 5% 5%6471.T NSK Neutral 1,637.00 7,739 0% 24.1X 14.1X 13.1X 2.0X 1.8X 1.7X 8% 13% 13% 2% 2% 2% 5% 8% 8% 1% 5% 5%7259.T Aisin Seiki Neutral 5,490.00 13,931 12% 14.6X 12.1X 11.5X 1.4X 1.2X 1.1X 9% 10% 10% 2% 3% 3% 9% 9% 9% 5% 8% 8%5108.T Bridgestone Neutral 4,543.00 32,018 15% 11.1X 10.2X 8.9X 1.3X 1.2X 1.1X 12% 12% 13% 3% 4% 4% 10% 9% 10% 6% 8% 9%6902.T Denso Neutral 5,095.00 36,975 4% 17.8X 16.0X 14.7X 1.1X 1.1X 1.0X 7% 7% 8% 2% 2% 3% 9% 9% 9% 5% 6% 7%5110.T Sumitomo Rubber Indu Sell 1,885.00 4,453 10% 14.5X 10.7X 8.9X 1.2X 1.1X 1.0X 8% 10% 11% 3% 3% 3% 7% 7% 7% 4% 7% 11%3116.T Toyota Boshoku Neutral 2,577.00 4,300 124% 11.3X 11.1X 10.9X 2.0X 1.8X 1.6X 20% 17% 15% 2% 2% 2% 12% 12% 11% 11% 9% 9%
Japan avg. 24% 16.0X 12.3X 11.3X 1.5X 1.3X 1.2X 10% 12% 12% 2% 3% 3% 8% 9% 9% 5% 7% 8%LEA Lear Corp. Sell 137.90 10,111 5% 8.9X 8.6X 8.4X 2.6X 2.2X 1.9X 32% 28% 24% 1% 2% 2% 31% 28% 26% 10% 10% 9%ADNT Adient Neutral 68.52 6,407 7% 7.7X 7.8X 6.6X 1.3X 1.1X 1.0X 18% 16% 16% 1% 2% 2% 0% 12% 13% 4% 10% 12%MGA Magna Neutral 42.66 16,339 9% 7.5X 6.7X 6.3X 1.8X 1.9X 1.6X 23% 27% 27% 3% 3% 3% 8% 8% 16% 6% 10% 10%BWA BorgWarner Inc. Neutral 41.28 8,906 10% 12.1X 10.8X 9.6X 2.5X 2.2X 2.0X 21% 21% 22% 1% 1% 2% 16% 16% 16% 6% 7% 8%DLPH Delphi Buy 78.90 21,533 8% 12.2X 10.9X 9.9X 7.5X 6.1X 5.0X 66% 61% 55% 2% 2% 2% 25% 24% 22% 6% 7% 8%GT Goodyear Buy 35.94 9,416 20% 8.8X 6.6X 5.2X 1.9X 1.6X 1.3X 22% 26% 26% 1% 1% 1% 13% 14% 14% 7% 13% 18%NEMAKA.MXNemak Neutral 20.74 3,389 9% 9.6X 9.6X 8.9X 1.7X 1.5X 1.3X 17% 16% 16% 3% 3% 3% 16% 14% 14% 6% 5% 5%
US avg. 10% 9.5X 8.7X 7.8X 2.8X 2.4X 2.0X 29% 28% 27% 2% 2% 2% 15% 17% 17% 6% 9% 10%
CROCI FCF yield
P/E P/B ROE Dividend yield CROCI FCF yield
P/E P/B ROE Dividend yield
Time Event
2017Potential technology break‐through of the integrated motion control
technology from joint venture with Continental
2017‐2018Potential announcement of backlog expansion of ADAS featured EPS
and SWB systems
2017‐2018 Potential value‐accretive M&A within ADAS/AV scope
2019‐2020 Potential commercialization of SWB system
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 25
Exhibit 52: Income statement (USD mn)
Source: Company data, Gao Hua Securities Research.
Exhibit 53: Balance Sheet (USD mn)
Source: Company data, Gao Hua Securities Research.
Income Statement 2014 2015 2016 2017E 2018E 2019E1H 2H 1H 2H 1H 2H
Total sales/revenues 2,978 3,361 3,842 4,142 4,747 5,509 1,642 1,718 1,924 1,918 2,029 2,112 yoy % 24.8% 12.8% 14.3% 8% 15% 16% 14% 11% 17% 12% 5% 10%
- COGS (ex-depreciation) (2,439) (2,673) (3,018) (3,245) (3,719) (4,316) (1,319) (1,354) (1,513) (1,505) (1,590) (1,655) Others - - - - - -
Total COGS (2,439) (2,673) (3,018) (3,245) (3,719) (4,316) (1,319) (1,354) (1,513) (1,505) (1,590) (1,655) -
Gross profit 539 687 824 897 1,028 1,193 323 364 411 413 439 457 yoy % 30% 28% 20% 9% 15% 16% 28% 27% 27% 14% 7% 11%
- SG&A (178) (214) (253) (277) (318) (364) (98) (116) (127) (127) (136) (141) Other operating income/(expense) - - - - - - - - - - - -
Total operating expense (178) (214) (253) (277) (318) (364) (98) (116) (127) (127) (136) (141) EBITDA 361 473 571 620 710 829 225 248 285 287 304 316
yoy % 44% 31% 21% 31% 31% 26% 16% 7% 10%-
Depreciation (80) (89) (94) (93) (102) (122) (43) (45) (45) (49) (46) (47) Amortization (39) (53) (69) (84) (84) (84) (25) (28) (32) (37) (41) (43)
EBIT (operating profit) 242 331 408 443 524 623 157 174 208 201 217 226 yoy % 37% 36% 24% 9% 18% 27% 45% 33% 15% 5% 13%
- Interest income 2 2 1 2 3 5 1 1 1 1 1 1 Interest expense (23) (33) (32) (30) (30) (30) (17) (17) (16) (15) (14) (15)
Net interest income/expense (22) (31) (30) (28) (27) (25) (15) (16) (16) (14) (14) (14) Profit/loss on disposal of assets (pre-tax) - - - - - - - - - - - - Foreign exchange gain/(loss) (0) (7) 8 - - - (3) (4) 9 (1) - - Net income from associates - - - 0 1 1 - - - - 0 0 Share of results in jointly controlled entities (1) 1 1 - - - 0 1 1 (1) - - Impairment loss of assets - - - - - - - - - Other non-operating income/expense (5) (11) (1) (1) (1) (1) (5) (6) (1) 0 (1) (1) Non-operating income/(loss) (28) (47) (22) (29) (27) (25) (22) (25) (7) (16) (14) (15) Pre-tax profit (income before tax) 215 283 386 415 497 598 134 149 201 185 203 211
yoy % 42% 32% 36% 7% 20% 20% 20% 45% 50% 24% 1% 14%- - -
Income taxes (51) (73) (84) (90) (108) (130) (35) (38) (48) (36) (44) (46) Minority interest (2) (5) (7) (8) (9) (10) (3) (2) (4) (3) (4) (4) Preferred dividends - - - - - - - - - - - - Extraordinary gain/(loss) - - - - - - - - - - - - Net income 161 205 295 317 380 458 97 109 149 146 155 161
yoy % 48% 27% 43% 7% 20% 20% 19% 35% 54% 34% 4% 11% - EPS - basic 0.06 0.08 0.12 0.13 0.15 0.18 0.04 0.04 0.06 0.06 0.06 0.06 EPS - fully diluted 0.06 0.08 0.12 0.13 0.15 0.18 0.04 0.04 0.06 0.06 0.06 0.06
201720162015
Balance Sheet 2014 2015 2016 2017E 2018E 2019E
Cash and equivalents 380 417 484 737 1,015 1,255 Net receivables 525 570 590 636 728 845 Inventory/stocks 226 254 262 281 323 374 Other current assets 94 95 92 92 92 92 Current assets 1,226 1,336 1,428 1,745 2,158 2,567 Gross PP&E/Fixed assets 844 992 1,180 1,345 1,534 1,836 Less accumulated depreciation (218) (307) (401) (494) (596) (718) Net PP&E/Fixed assets 626 685 779 851 938 1,118 Gross intangibles 405 522 633 633 633 633 Accumulated amortization (61) (114) (183) (267) (350) (434) Net intantigibles 344 408 450 366 283 199 Total investments 6 10 11 13 17 20 Other long-term assets 41 18 26 26 26 26 Total assets 2,242 2,457 2,693 3,003 3,421 3,931 Accounts payable 439 559 604 650 745 864 Short-term debt and current portion of long-term debt 97 81 75 75 75 75 Other current liabilities 146 167 180 185 197 213 Current liabilities 682 807 860 910 1,018 1,153 Long-term debt 634 561 489 489 489 489 Other long-term liabilities/creditors 218 235 253 253 253 253 Total long-term liabilities 852 795 742 742 742 742 Total liabilities 1,534 1,602 1,602 1,652 1,760 1,895 Preferred shares - - - - - - Common stock 350 288 224 224 224 224 Treasury stock - - - - - - Retained earnings 333 540 834 1,088 1,392 1,758 Other common equity - - - - - - Total common equity 684 827 1,059 1,312 1,616 1,983 Minority interest (balance sheet) 24 27 32 38 45 53 Total shareholders funds/equity 708 854 1,091 1,350 1,661 2,036 Total liabilities and equity 2,242 2,457 2,693 3,003 3,421 3,931
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 26
Exhibit 54: Cash flow statement (USD mn)
Source: Company data, Gao Hua Securities Research.
Related Research
What Would the Transition to Destination-Based Taxation Look Like? dated December 8,
2016.
China: Automobile: Parts: Limited impact of near-term volume growth/pricing headwinds
on suppliers; Buy Weifu dated November 11, 2016
Steering toward increase/upgrade in product content; initiate at Buy dated May18, 2016
Cars 2025: Vol. 3: Monetizing the rise of Autonomous Vehicle, dated September 17, 2015
Upward mobility: The rise of global autos; competitive positioning in a growing, evolving
auto industry (Mar 1, 2014)
Cash Flow Statement 2014 2015 2016 2017E 2018E 2019E
Income pre-preferred share dividends 161 205 295 317 380 458 Minority interest add-back 2 5 7 8 9 10 Depreciation and amortization add-back 119 142 163 176 186 206 Net income from associates and jointly controlled entities 1 (1) (1) (0) (1) (1) Net loss/(gain) on asset sales 5 6 1 1 1 1 (Increase)/decrease in working capital : (112) 36 18 (20) (39) (49)
Accounts receivable (197) (61) (20) (46) (93) (117) Inventory (49) (41) (8) (20) (41) (52) Accounts payable 134 138 46 45 95 120
Other operating cash flow items 78 75 14 - - - Cash flow from operations 254 468 497 481 536 624 Capital expenditure (279) (277) (192) (166) (190) (303) (Acquisitions)/divestitures 7 4 - - - - Investments (3) (2) (2) (2) (2) (2) Other investment cash flow items - - - - - - Cash flow from investing (276) (276) (195) (168) (192) (305)
Dividends paid (common and preferred) (22) (32) (41) (59) (63) (76) Share repurchase/issue (change In common stock) - - - - - - Share repurchase/issue (change In other common equity)Increase/(decrease) in short-term debt - - - - - - Increase/(decrease) in long-term debt 143 (91) - - - - Increase/(decrease) in preferred shares - - - - - - Change in minority interest - (1) (2) (2) (2) (2) Other financing cash flow items (31) (37) (192) - - - Cash flow from financing 91 (162) (234) (61) (65) (78) Effect of foreign exchange rate changes (3) 6 - - - -
Total cash flow 66 37 68 252 278 240
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 27
Disclosure Appendix
Reg AC
We, Yuqian Ding, Yipeng Yang and Longjin Li, hereby certify that all of the views expressed in this report accurately reflect our personal views about
the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,
related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
Investment Profile
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The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Yuqian Ding: A-Share Autos, China Autos. Yipeng Yang: A-Share Autos, China Autos.
A-Share Autos: Anhui Jianghuai Automobile Co., Chongqing Changan Auto (A), FAW Car, Fuyao Glass Industry Group (A), Great Wall Motor Co.(A),
Huayu Automotive Systems, SAIC Motor, Weichai Power (A), Weifu High-Technology Group (A).
China Autos: Baoxin Auto Group, Brilliance China Automotive, BYD Co., China Harmony New Energy Auto, Dongfeng Motor, Fuyao Glass Industry
Group (H), Geely Automobile Holdings, Great Wall Motor Co. (H), Guangzhou Automobile Group, Minth Group, Nexteer Automotive Group, Sinotruk
(Hong Kong), Weichai Power (H), Zhengtong Auto Services Holdings, Zhongsheng Group.
Company-specific regulatory disclosures
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Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Nexteer Automotive
Group (HK$11.42)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: Nexteer Automotive Group (HK$11.42)
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global Equity coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 32% 54% 14% 64% 60% 51%
As of January 1, 2017, Goldman Sachs Global Investment Research had investment ratings on 2,902 equity securities. Goldman Sachs assigns stocks
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March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 28
Price target and rating history chart(s)
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8.98
9.339.9
15,000
17,000
19,000
21,000
23,000
25,000
27,000
29,000
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
Nexteer Automotive Group (1316.HK)
Goldman Sachs rating and stock price target history
Stock Price Currency : Hong Kong Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2016.
The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.
Rating
Price target
Price target at removal
Covered by Yuqian Ding,as of May 17, 2016
Not covered by current analyst
Hang Seng Index
Inde
xPr
ice
Sto
ckPr
ice
Nov 11, 2016 to N from B
May 17B
F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D
2014 2015 2016
March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 29
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March 27, 2017 China: Automobiles
Goldman Sachs Global Investment Research 30
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